Indonesia to Hedge Foreign Debt Costs First Time on Rupiah Slide

Indonesia will guard its foreign-
debt costs for the first time against exchange-rate fluctuations
as the rupiah extends a six-quarter slide versus the dollar.

The Finance Ministry will start hedging interest payments
on foreign-currency liabilities against exchange-rate volatility
this year to prevent the budget deficit from widening beyond
estimates, Bambang Brodjonegoro, head of fiscal policy, told
reporters in Jakarta today. The government is studying which
instruments to use for the purpose, he said, adding current
rules allow such transactions to be undertaken only in 2013.

The rupiah’s 5.9 percent drop last year was the biggest
since 2008 and the worst performance among Asia’s 11 most-traded
currencies. Indonesia had $90.7 billion in foreign-currency debt
as of Dec. 31, or 44.4 percent of its outstanding borrowings,
finance ministry data show. The ratio was 45.1 percent at the
end of 2011 and 46.3 percent a year earlier. The rupiah, which
weakened every quarter since mid-2011, weakened 1.3 percent this
month to 9,760 per dollar, according to prices from local banks
compiled by Bloomberg.

“Hedging is only a common practice to prevent uncertainty
in the budget, and it does not mean we are not confident of the
rupiah,” Brodjonegoro said. “Currently we are only allowed to
hedge our debt interest payments, but we have proposed to be
able to hedge fuel costs in 2014.”

Officials in the nation’s debt management office have
discussed the plan in the past two months, Singgih Gunarsa, a
spokesman for the office, said by phone today. They have
proposed derivatives including currency and interest-rate swaps
to the finance minister as possible hedging tools, he said.

Bank Indonesia

Indonesia’s central bank said this week that it stepped up
intervention in the past two weeks to support the rupiah after
an offshore fixing sank to the biggest discount to the onshore
spot rate in almost 16 months.

Bank Indonesia acted to boost dollar supply in the market
to revive confidence in the rupiah and narrow the gap between
local and overseas prices, Hendar, executive director for
monetary policy, said in an interview on Jan. 28. The monetary
authority sees room to adjust foreign-exchange rules to temper
excess dollar demand and stabilize the rupiah, he said, without
elaborating.

The difference between rupiah quotes within Indonesia and
those outside reached 2.6 percent on Jan. 11, the widest since
Sept. 22, 2011. Analysts at HSBC Holdings Plc led by Paul Mackel
in Hong Kong wrote in a research note on Jan. 11 that the “two-
tiered market” for the rupiah may prompt companies to hoard
dollars and Indonesians to prefer foreign currencies.

Volatility Eases

One-month implied volatility for the rupiah, which measures
expected moves in exchange rates used to price options, has
declined to 6.25 percent from last year’s peak of 17.73 percent
in May, which was the highest level since July 2009, data
compiled by Bloomberg show.

The government has a long-term plan to reduce its reliance
on international borrowings to better manage its foreign-
currency risk, Robert Pakpahan, director general at the debt
office said in a Nov. 22 interview.